Weighted Moving Average

Weighted Moving Average

An average in which some values count for more than others, and in which less recent values are dropped off the average. For example, if an index is weighted for prices over the previous 20 days, this means that the average price of the stocks will move more when the values with higher price move and values are removed from the average after 20 days have elapsed. This helps correct for both outdated information and the fact that averages tend to be affected by extreme values.

The weighted moving average has poor forecast accuracy due to its reliance on simple weights rather than rigorous statistical models that capture trends, day of week and week of year patterns and correlation in the data accurately.

As with the equally weighted moving averages, the parameter u is assumed to equal zero.

This concept is illustrated in Chart 2, which plots time series of value-at-risk measures using exponentially weighted moving averages

We begin by explaining the three most common categories of value-at-risk models--equally weighted moving average approaches, exponentially weighted moving average approaches, and historical simulation approaches.

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